National Treasury Budget and Strategic Plan: briefing

Meeting report

FINANCE PORTFOLIO COMMITTEE
12 April 2005
NATIONAL TREASURY BUDGET AND STRATEGIC PLAN: BRIEFING

Chairperson

(see Treasury Website)
National Treasury presentation on budget and Strategic Plan
National Treasury: General observations and comments on expenditure trends
Programme 3: Assets and Liabilities
Programme 4: Financial Management and Systems
Programme 5: Financial Accounting and Reporting
Programme 6: Provincial and Local Government Transfers
Programme 7: Civil and Military Pensions, Contributions to Funds and other Benefits
Programme 8: Fiscal Transfers

SUMMARY
The National Treasury briefed the Committee on its budget and Strategic Plan. One of the main issues was that the mix of 20% foreign government debt and 80% local debt had been reviewed. The ratio had been adopted when SA had a net open forward position of about $18 billion. SA now had positive reserves of $15.4 billion. Treasury had decided not to increase foreign borrowing significantly as the risks arising from currency volatility were too great and South Africa had a formidable domestic market. Foreign debt represented only 13.5% of all government debt. It was decided to borrow $1.5 billion in foreign markets for the first time so as not to crowd out the domestic capital market. South Africa had a redemption of about $300 million of foreign debt and this meant a net foreign budgeted borrowing of about $1.3 billion.

Government’s R9, 6 billion tax revenue windfall raised in the 2004-05 fiscal year would be used to repay government debt maturing this year. It could not be used for other government expenditure this year because the 2005-06 budget had already been prepared and tabled. By repaying debt, government would reduce debt-servicing costs and release resources to other areas of expenditure.

Shortage of skills remained a problem across all government Departments. Some municipalities still did not have the capacity to spend money allocated to them and to perform their functions. Treasury was of the opinion that in some cases the problem was poor performance by officials instead of lack of capacity. There was a lack of capacity and Premiers seldom took action against people who over spent or under spent their budgets.

Some of the issues raised during discussion included:
- the type of work done on tax policy to make South Africa more effective and internationally competitive;
– what steps would be taken to maintain the coherence of the tax system if provinces were to levy their own taxes;
– what would replace the Regional Services Council levy; and
- which risk factors had been considered when Treasury arrived at a 30% and 70% mix in respect of the floating and fixed debt.

MINUTES
The Chairperson welcome delegates from National Treasury. This was supposed to be a joint meeting with the Select Committee on Finance but the Select Committee could not attend due to other engagements. The following delegation from Treasury attended the meeting.

Mr J Moleketi (Deputy Minister of Finance)
Mr L Kganyago (Director General)
Ms T Pandy (Director: Communication Unit)
Mr T Plaatjie (Parliamentary Liaison Officer)
Mr L Wort (Chief Operating Officer)
Mr F Nomvalo (Deputy Director-General: Office of the Accountant-General)
Mr I Momoniat (Deputy Director-General: Intergovernmental Relations)
Mr A Donaldson (Deputy Director-General: Public Finance/Budget Office)
Mr P Hadebe (Deputy Director-General: Asset & Liability Management)
Ms N Allie-Edries (Deputy Director-General: Corporate Services)
Mr C Kruger (Deputy Director-General: Specialist Functions)
Dr F le Roux (Deputy Director General: Pensions Administration)
Ms H Pretorius (Chief Financial Officer: Pensions Administration)
Mr S Mngomezulu (Acting Chief Financial Officer)
Mr O Kwinana (Chief Director: Human Resource Management)
H Pringle (Director: Office Administration in Director General’s Office)
Mr T Zulu (Deputy Director: Director General’s Office).

The Deputy Minister thanked the Committee for the opportunity to present before it. Unfortunately the Minister of Finance could not attend the meeting since he was attending to international activities that were part of Treasury’s mandate. Treasury was mandated with ensuring that South Africa participated in international activities and continually raise issues around the plight and challenges facing developing countries.

Mr S Asiya (ANC), notwithstanding the apology on behalf of the Minister, felt that it was improper for Treasury not to submit a formal written apology from the Minister. This meeting was an opportunity for the Minister to account to the Committee on various aspects of Treasury’s activities.

The Chairperson replied that this was not the time for the Minister to account to the Committee. Only the Director General was expected to be present in the meeting and it was a bonus that the Deputy Minister was present. The Minister was expected to account during the actual budget vote debate.

The Director General briefed the Committee on Treasury’s Strategic Plan 2005/08. (See document attached). Treasury’s aim was to promote good governance, social progress and rising living standards through the accountable, economical, efficient, equitable and sustainable management of public finances. Some of its strategic objectives were to promote sustainable economic growth and work opportunities, reducing poverty, ensuring good governance and accountability, promoting optimal allocation and utilisation of financial resources and maintaining economic stability.

Treasury intended to continue the strengthening of political oversight over the annual budget process and enhancing the quality of budget documentation. It would also strengthen its fiscal analysis capacity and improve planning, coordination and monitoring of infrastructure spending and projects of a capital nature.

It was important to lower the cost of government debt to release resources to other areas of expenditure and to diversify existing debt instruments. Some of its prudent debt and financial assets management plans included implementing a comprehensive risk management policy on a government-wide basis and ensuring optimal cash management practices. Treasury would continue to support international programmes and the Minister’s roles in international institutions like the International Monetary Fund. It had reduced budgets allocated to the Administration, Assets and Liability Management and Financial Management and Systems programmes. The funds taken from the programmes were made available for use in other programmes.

Discussion
Ms J Fubbs (ANC) focused on Treasury’s engagement with Parliament in respect of identification and roll out of legislation. It would be useful if the Committee could get an understanding on how the roll out was prioritised and what measures were in place to examine the requirements of the Constitution in respect of developing financial and related legislation. It was also important to know if there were processes in place to audit legislation enacted since 1994 for loopholes. The Strategic Plan referred to engagements with the Standing Committee on Public Accounts but no mention was made of the Portfolio Committee on Finance. She wondered if this was an oversight.

Mr Kganyago replied that legislation was prioritised per programme and Treasury did not have control over some legislation. Treasury might think that a particular piece of legislation was not a priority only for another Department to say that the legislation was a priority for them. This was especially the case with money Bills. Treasury might be forced to source in special capacity to deal with particular legislation because it was not in its list of priorities. The Mining Royalties Bill was an example of such legislation. Some legislation did not make sense and had to be repealed or amended in order to close loopholes. He invited the Committee to inform the Treasury should it identify any loopholes in legislation. He agreed that the Strategic Plan did not refer to engagements with the Portfolio Committee but the Committee was very important to Treasury. The Standing Committee on Public Accounts had insisted that it wanted quarterly reports on the implementation of the Public Finance Management Act.

The Chairperson noted that the Strategic Plan stated that labour market conditions had complicated the attraction of scarce skills in certain areas. This largely revolved around salaries offered in the public service as compared to those offered in the private sector. He asked how Treasury planned to attract the necessary people given the market conditions. Treasury would, over the next five years, prioritise an analysis of interest and exchange rates variations. He agreed that the analysis was important but asked what had informed it.

On the prioritisation of the interest rate variation analysis, the DG replied that the government’s Programme of Action provided that the Executive should work with the monetary authorities to ensure that the objectives of a stable and competitive exchange rate and appropriate inflation rate were attained. There was a lot of noise in people’s arguments as they debated what was the appropriate exchange rate. One increasingly found people asking why Treasury did not act as an arbiter so that its policy stance would be objective and informed. There were no doubt these two variables impacted on growth and other macro-economic variables.

Mr B Mnguni (ANC) said that one of Treasury’s objectives was to retain skills. Treasury had scaled down expenditure in three programmes. He asked how Treasury planned to achieve its targets given that it had scaled down on resources. There were two vacancies in the Senior Management Service and these were critical positions. He asked when Treasury would fill the vacancies. He also asked if people who occupied certain positions in an acting capacity did not have the skills necessary to fill the positions on a full time basis.

Mr Y Bhamjee (ANC) asked why there were many vacancies if Treasury was an employer of choice to many people as had often been said in the past. The vacancy rate reflected poorly on Treasury. He also asked what the impact would be if an employee from Senior Management Service (SMS) resigned and if there were systems aimed at ensuring that employees did not leave after Treasury had trained them.

Mr I Davidson (DA) said that the two vacant Senior Management Service posts were critical to Treasury. He wondered what was the effect of the vacancies was on the operation of Treasury. He asked at which levels the vacancies existed and how Treasury intended to attract the necessary expertise.

The Director General replied that Treasury had, through budget guidelines it had issued, asked all government Departments to cut down administration costs and channel resource to actual service delivery. The money received from cutting down on administration costs was not returned to the National Revenue Fund but used to fund other programmes whose budgets had increased. Treasury was going through changes and one of the people who had been serving in an acting capacity was seconded to the United Kingdom’s Treasury.

In previous years there was an international programme in which South Africa was asked to play a leading role. Treasury had to re-look at it because it was clear that it could not continue with the programme as it stood. It was forced to split this division to realign tax and financial sector policy. The question was what one did with increased international responsibilities. Did one slice up international responsibilities and put some of them in domestic responsibilities? Following a look at the integration of the economy, one might argue that despite it being an international issue it was also a very important domestic economic policy issue because one did not grow the economy by selling to oneself. There was a need for a growing Africa for South Africa to grow as a country. Instead of having an Africa desk somewhere, one would have to integrate work on Africa in the way one conducted the country’s economic policies. The other international responsibilities would be located elsewhere in the Treasury. The feeling was that the work supported the Minister in a direct way and should therefore be located within the Ministry. Treasury would have discussions with the Ministry on how to deal with this issue.

He said that the public service had decided to go on an exercise of identifying scarce resources. There were particular skills that were known to be scarce in Treasury. Treasury should be commended for managing to produce the consolidated financial statements of government. The Office of the Accountant General used to have three or four professional accountants. It was now running at 90% capacity and this made it possible for the Office to catch up with five years of outstanding consolidated financial statements. These were tabled at the end of March 2005. Treasury was on course to submit statements for the financial year ended March 2005. Treasury had advertised vacant positions and had received numerous applications. It made three rounds of offers to various people but most people turned them down. The challenge was to ensure that trained officials who were emerging from within Treasury’s ranks would be able to take over. Treasury was a very important training place for people in both the public and private sectors. Some of the people who left Treasury went to other government Departments or institutions and this was not that bad since they were adding value in other government areas. Forty-five persons were currently doing internships and more would be taken during the course of the year. There was no obligation to employ such people after their internship but the practice was to absorb those who had demonstrated the necessary skills. It was well known that Treasury had a very good internship programme and some companies targeted the interns for recruitment. It was very difficult to attract Chartered Accountants. All other governments Departments were experiencing the problem of skills shortage in one area or another.

The Director General added that most of his colleagues had joined Treasury around the same time with ambitions to change the way public finance was managed. They still believed that they had a role to play in ensuring that public finances were in an even sounder position. Some people were not prepared to accept full time jobs at Treasury for financial reasons. This forced Treasury to engage such people for specific projects and on contract basis.

The Chairperson asked if the shortage of skills was greater than it was last year.

Ms Allie-Edries replied that Treasury had appointed 240 people in the period under review. 177 of them were brought from outside the public service. It had reduced the vacancy rate from around 30% to 23%. It was also making use of specialised head hunting agencies.

Mr Momoniat replied that in terms of core functions, Treasury was able to perform its functions effectively. It did not have critical shortages in core functions. It was important to focus on outputs and filling vacancies was not an output. A Department was considered to be more efficient if the quality of its work had not suffered despite the vacancies.

Mr Hadebe replied that the Asset and Liability Management division had to compete with big companies and banks for qualified personnel and it was difficult to attract skilled people. It adopted an approach of getting people when they were still young, train and hold them for some time. There had been a change in approach from the broader market perspective. The division was now able to attract people with structured finance skills. His division had managed to attract three new skilled persons who had been working on Treasury operations. There was a feeling that one had to join the Treasury in order to be "well rounded" in the financial market. Most people probably had no intention of staying with Treasury for too long. By joining Treasury they offered an advantage in that they presented opportunities for young people to learn from them.

Mr Asiya asked if Treasury had minimised the amount of overtime worked per person.

The Director General said that most members of his delegation would not normally claim overtime because they knew that it was expected that they would work long hours. In many instances people preferred to take leave in lieu of overtime payment.

Ms Allie-Edries replied that most non-Senior Management Services workers requested overtime towards the end of the financial year or during preparation of the budget. There were usually no overtime payments in Treasury.

Mr Davidson asked what type of work had been done on tax policy to make South Africa more effective and internationally competitive. A lot had been said on what would be the most effective tax rate in emerging countries. On the issue of provinces having separate taxes, he asked how many applications had been received so far and how they were handled. It was important to ensure the coherence of the country’s tax system. The point was how Treasury viewed this in terms of keeping the general tax level on companies within a certain defined area. It had been said that the Regional Services Council (RSC) levy would be phased out. He asked if Treasury had anything in mind to replace it. The Financial and Fiscal Commission and Treasury had indicated that in terms of capital expenditure there was a huge amount of under spending by provinces and municipalities. This indicated that there were capacity problems. He asked how one could overcome this problem.

Mr Momoniat replied that there was a provincial tax regulation in place to ensure that provincial taxes were in line with national policy. No applications had been received despite lots of newspaper reports. With regard to the RSC levy, Treasury was looking at a combination of taxes or grants to replace it. There might be a need for some metropolitan councils to raise certain taxes. On the capacity issue, he said that one could not say when all municipalities would have the required capacity. The question was why there was lack of capacity while there were a managers who was being paid a huge salaries. There was a need for more accountability and performance. One could only help those who wanted to be helped. Some people did not bother to attend courses that were arranged to help them.

Mr Donaldson replied that there were many steps involved in putting up tax proposals together and major tax reforms involved consultations. For instance, in the retirement funds area, there was a discussion document and tax reforms would follow once consultations were complete. Some adjustment would be made to the treatment of medical aid schemes. There were massive amounts of literature on international trends in respect of taxes and Treasury had always kept track of them. It was important to look at international trends before making tax reforms. South Africa had observer status in the OECD forum that dealt with tax policy and had learnt a lot from the forum. The small business sector was one area identified for tax reforms. Treasury was always looking at what had to be done to encourage economic growth.

Mr M Johnson (ANC) said that a point was raised in previous engagements on the extent to which Treasury was helping provincial Treasuries with capacity. The Municipal Finance Management Act (MFMA) was being rolled out. It was important to have time frames especially in respect of capacity building. The Local Government Restructuring Grant would be phased out in 2007. He asked if all targets would have been achieved by that time.

Mr Asiya said that the Estimates of National Expenditure provided that Treasury had to monitor all transfers to local government. He asked if it was possible to have quarterly reports so as to be able to see what was happening on the ground. He referred to a report by the South African Local Government Association that indicated a number of municipalities with financial problems. It was important to include yardsticks and performance indicators in the Strategic Plan to judge if local governments were making any progress.

Mr Momoniat replied that Treasury monitored spending against capital budgets and not the grant because money was fungible. The equitable share was largely unconditional and Treasury focused on financial statements. The line function Departments were responsible for monitoring conditional grants. He conceded that there were problems and some Departments did not have the capacity to monitor those grants. This begged the question why they received the conditional grants in the first place.

Ms Fubbs asked if the quality of information from Departments, provinces and municipalities had improved. Treasury had often talked about delays caused in the publication of their documents like the Intergovernmental Fiscal Review. She asked if the problem was that provinces and municipalities were not sending the relevant people to workshops and courses or that Treasury’s guidelines were not clear. The information contained in the Strategic Plan had improved over the last four years. Some Strategic Plans contained indications if programmes had been completed or stopped. The current Strategic Plan did not have such information. Information that was critical to the Committee normally came out in the annual Division of Revenue Act. There was a time when Treasury published the Division of Revenue Bill very early. This was never repeated. It was very difficult for any Committee to digest the information contained in the Bill within a short period of time.

Mr Momoniat replied that there was a time when Treasury had published the Division of Revenue Bill well in advance. It was difficult to publish it earlier because of changes that normally took place. A lot of clauses in the Bill could be incorporated into the Public Finance Management Act (PFMA) once it was amended. The focus should be on the allocations and the formula. Some information could be released with the Medium Term Budget Policy Statement (MTBPS).

Mr Bhamjee said that the 2004 and 2005 Division of Revenue Bills had monies assigned to promote and support reforms to municipal financial management and the implementation of the Municipal Finance Management Act. He asked if this was not duplication.

Mr Momoniat replied that the financial management grant was split into two: the actual grants that went to the municipalities and allocations in kind. There was a programme through which people were placed in municipalities to help them solve the capacity problem.

The Chairperson agreed that there was a need for Treasury to provide information on progress made on outputs identified in previous Strategic Plans. Many people would agree that the quality of information coming from Treasury was improving. The real question was how to measure the improvement if the improvement was an output. This issue was also raised during discussions with Statistics South Africa.

The Director General replied that the Committee would receive more information on outputs when Treasury presented its annual report. He agreed that there was a need for a mechanism to measure the improvement in the quality of documents produced. Treasury was thinking of producing a questionnaire that would be sent to Committees so that they could make their input. It had in the past received various delegations from other treasuries who wanted to understand their budget documents.

Mr Mnguni said there had been talks about increasing the reserve requirements of banks and having financial stability in the Southern African Development Community. He asked what progress had made on this.

The Director General replied that the reference was not to reserve requirements but to monetary policy. The accumulation of the country’s reserves was a different matter. The reserves stood at $15.1 billion from a negative $25.2 billion in 1998. This was one of the reasons why rating agencies had decided to upgrade South Africa’s credit rating.

Mr Davidson asked Treasury to comment on the financial viability of local government. Grants could be made for community development projects. There could be a problem of maintenance of such projects due to the question of resources. The question was what was the criteria used for granting money to municipalities and what interest Treasury took in ensuring that money was properly spent and projects maintained properly.

Mr Momoniat replied that ‘Treasury was not God’ and there were things that it could not do. It could make allocations but whether people spent it properly and whether the infrastructure was maintained was a different matter. Unless every legislature and municipal council were strong in oversight there were no guarantees that anybody would spend their money properly. There would always be inefficient spending as long as there was no proper oversight and this was a challenge. Treasury took a lot of steps in dealing with under spending in 2003 only to find that very few Premiers were prepared to take action when there was over spending. It was surprising that the Auditor General hardly dealt with over spending as a major crime. Education had a back payment of R400m and one could not under stand how this happened. Programme six was an artificial division because all the issues were dealt with in the Division of Revenue Bill. It dealt with the only three conditional grants that were directly administered by Treasury.

With regard to questions relating to infrastructure, Mr Momoniat replied that the Provincial Infrastructure and Municipal Infrastructure grants complemented the capital budgets of provinces and municipalities. There had been lots of engagement on whether the budgets were adequate. Provisional numbers were published once provinces and municipalities had decided on their budgets. There was nothing more discouraging than publishing figures on under spending only to find that a legislature did not care to do something about under spending. There had been less oversight in the last year than there had been in other years. In some provincial legislatures people were getting used to the fact that it was too embarrassing to take action.

The President had said that no children should continue to learn under trees but less than 50% of the budget was spent after three-quarters of the year. It would not be surprising if the numbers on the amount spent were inflated. The question was who could figure out if the figures were correct. There would continue to be problems if provincial legislatures were not going to demand explanations from Heads of Department or take strong steps against MECs. It was not a capacity issue but a performance issue and there was a need to ensure that there was accountability. People should be able to give information on schools built and the state of infrastructure. In Treasury’s end of December report one Department of Public Works reported 1% spending but the percentage rose to 60% a month later. It was unbelievable that they managed to spend 59% of their budget in one month. One would ask if the Manager was fit to hold that position if he or she was to claim that the figures were accurate. It was discouraging that no action was taken against managers who were not performing as expected.

Mr Momoniat said that Treasury wanted to publish municipal budgets on a quarterly basis. It was hoped that the first reports would have been available by January or February but this was not possible because the MFMA was new and many municipalities did not provide information. In many instances people would say that the numbers were inaccurate. It was hoped that they would become more accurate as time went on if Treasury was to publish a report and indicated that some municipalities did not submit the required information. Treasury did an extensive study of the under spending problem and the results were not surprising. The institutional arrangements were problematic. The golden rule was that there should be one person responsible for a project and the responsibilities should be defined clearly. Planning for projects was also problematic. In most cases, large percentages of the capital budgets were spent in the last month of the financial year and this was due to lack of proper planning. There were also cases of fiscal dumping. It was surprising that the audit process did not pick this up.

On the issue of the financial viability of municipalities, he did not believe that urban municipalities were under funded. Two-thirds of their activities involved delivering water and electricity and they were expected to collect fees for this. The equitable share was meant to fund free basis service. There were issues with regard to more rural municipalities. There was very little delivery in municipalities where there was no piped water. The question was why some municipalities needed money if there was no service delivery. It was important to look at the services delivered by each municipality.

Mr K Moloto (ANC) focused on risk management. Treasury had, in previous encounters, explained how the mix of 20% foreign government debt and 80% local debt had been arrived at. He asked which risk factors were considered when Treasury arrived at the 30% and 70% mix in respect of the floating and fixed debt. With regard to the State Owned Enterprises (SOEs), the timeframes on Treasury operations was 2007. He asked if the guidelines had already been developed. He also asked how the 25% adherence by SOEs was arrived at and whether it was based on the size and value of the SOE. He congratulated Treasury for ensuring that 93% of SOEs complied with the King 2 Code on Corporate Governance and the PFMA. He asked what Treasury intended to do about the remaining 7%.

Mr Hadebe replied that initially when the project was put on the table the emphasis was on trying to get consultants because of skills shortage. However, it was resolved at Ministerial level that the project should be done in-house because the companies that had submitted tenders already had some transactions with SOEs. This could have raised conflicts of interests. The project would have taken a shorter period of time if one had consultants working on it. It would probably take longer because Treasury had only three people working on it. The guidelines had already been developed and given to all SOEs. The most important thing was the willingness of SOEs to begin to implement the guidelines. It was difficult to have guidelines that would suit all SOEs because the SOEs themselves were different. One would have to construct a programme of action for each SOE within the guidelines. The adherence issue would only come after the SOEs had delivered their operations in line with the guidelines.

The Chairperson asked if the mix of 20% foreign government debt and 80% local debt was the limit or if it was the position in which South Africa was. He also asked if this varied and if it was based on an analysis of comparative interest and exchange rates. He wondered what the level of public external debt was and how it compared internationally. He was under the impression that SA had low exposure to foreign debt as compared to other countries.

Mr Hadebe replied that there were two components of risk to domestic and foreign debt. The first component on the domestic side was volatility of interest rates. The volatility of interest rates had an impact on the cost of servicing a debt. The second component on the foreign side was currency volatility. The question was how to measure these two. With regard to the fixed versus floating debts, he said that the feeling was that inflation would decrease. This was in line with the broader macro-economic policies of the government through inflation targeting. The argument was that the debt manager should not increase the duration. If one continued to borrow at the long end of the curve, the debt portfolio would be more sensitive to interest rates as one went forward. One would be forced to reduce the duration or the average maturity of the bond. The calculations that Treasury did indicated that South Africa must have an average yield on government bonds of about 7%. South Africa was in an advantageous position because it could borrow for 30 years. The question was how to reduce the maturity of a bond in a domestic market so that one did not get exposed to the volatility of interest rates. One could use floating bonds to reduce duration. To deal with inflation sensitivity, the Treasury had decided on a mix of 30% floating bonds and 70% fixed income bonds. There was a need to be sensitive to interest rates but also enjoy the benefits of macroeconomic growth and stability.

With regard to the 20% and 80% mix, he said that South Africa was one of the most sophisticated capital markets in the world and rating agencies put it in the top ten. One had to evaluate the risk on the currency one would be taking by borrowing outside the country. A good example was what happened in 1998/9 during the financial crisis. Countries that had a huge exposure to foreign markets found themselves with problems because they could not redeem or service their debts. South Africa had survived even though it had to be out of the market for one day. A rule of thumb that had been put forward was that a country should have a 40% foreign and 60% domestic mix. This trend was beginning to change as emerging markets were encouraged to improve their domestic market. The mix of 20% foreign government debt and 80% local debt was being reviewed. The ratio was adopted when SA had a net open forward position of about $18bn. South Africa now had positive reserves of $15,4bn. There was no need to increase foreign borrowing because the risk was too much and South Africa had a formidable domestic market.

Mr Davidson asked how the R9, 6bn tax revenue windfall would be utilised. A lot had been said about tax breaks. He asked if it would be used for debt reduction. Little had been said about the R165bn that would be used by SOEs for recapitalisation. There had been no mention of the infrastructure roll out. He asked if the money would be raised internationally.

Mr Hadebe replied that there were a number of factors that had to be considered before agreeing on a debt management structure. The most important were the public sector borrowing, decreasing liquidity and the current account deficit and improving growth prospects. As foreign debt represented only 13,5% of all government debt, it was decided to borrow $1.5 billion on foreign markets so as not to crowd out the domestic capital market. South Africa had a redemption of about $300 million of foreign debt and this meant that in net South Africa would have borrowed about $1.3 billion. This created huge space for state-owned enterprises to borrow on the local market. The borrowing requirements of SOEs had to go through Treasury. Treasury had to make sure that their funding strategies over the next three to four years were in line with government objectives.

The Director General replied that windfalls usually came after the appropriation had been done. Consequently the money was not available for government to spend. The only way of dealing with it was to bring down the borrowing requirement and repay the debt that was falling due. In so doing one would reduce debt-servicing costs and release resources to other areas of expenditure.

Mr T Vezi (IFP) congratulated Treasury on good financial management and systems. The scaling down on the use of consultants yielded positive results. There were cases in some rural areas where 70% of the budget of a project had been sent on consultants. It was understandable that there was a limit to what Treasury could do. But with the looming local government elections, there would be a lot of fiscal dumping that would take place in rural areas. Unnecessary community halls and other infrastructure would start ‘coming up like mushrooms’. He asked what kind of intervention could be made to prevent this from happening. It was in the interest of Councillors to build such infrastructure because they wanted to be popular with the electorate.

Mr Kruger replied that he was also concerned by the use of consultants. Treasury intended to have tight control over the management of consultants and was changing some of the contracts that were issued through the State Tender Board process into proper service level agreements. A lot of money had been saved through proper management of contracts.

Ms Fubbs noticed that Treasury was developing an implementation strategy for transition from cash to an accrual basis of accounting and the milestone stated in the Strategic Plan was 30 September 2005. She asked if this meant that all programmes in all government Departments would be moving in this direction on this date or if particular Departments or programmes were identified for the transition.

Mr van Dyk asked if Departments were ready to make the transition.

Mr Nomvalo replied that experience in other countries had shown that one needed to have a willing audience across the board. There was also a need for financial systems to support the transition and people to ensure that the tools were used properly. Not all Departments would cross over to the new system but there was a programme that took into account the capacity of government to deliver. It was not so simple to say if Departments were ready or not. Everybody who had gone through school or university education in South Africa was taught under the accrual basis. It was true that there were skill shortages but one should also acknowledge that the limited skills that were present were based on the accrual system. He conceded that not all Departments were ready, but it was not impossible to implement the programme. There was a need to identify the Departments that had the right level of readiness and deal with them in one go. It was important not to create complications for the Departments and the Auditor General in terms of the auditing process. There was a need for preparatory work to take place to ensure that everybody was reasonably ready on the date.

The meeting was adjourned.